The trouble with a customs union

Back in 2016 almost no one knew anything about single markets or customs unions. Voters didn’t, and as it turns out, MPs didn’t either. You’d think they would by now.

Not so. If they did, Parliament wouldn’t be so keen for the UK to enter a permanent customs union (where we agree to charge the same tariffs as the European Union on all imports) with the EU (it was one of the closest calls in this week’s otherwise pointless round of indicative votes, and apparently a favoured option of Jeremy Corbyn’s).

A customs union sounds like a nice idea (less disruption for the many UK firms that export into the EU) and you might think that the UK not being able to have an independent post-EU trade deal isn’t much of an issue, all things considered. But the devil, as ever, is in the detail.

The EU is a relatively protectionist organisation – the customs union forms a tariff shield around us all – and without the UK to make the free-trade case within it, it is more likely to become more so than less so. That could mean more tariffs and higher prices – not ideal. But there is a much bigger problem – the lack of reciprocity inherent in a customs union.

A letter to the Financial Times from Vernon Bogdanor, a professor of government at King’s College London, sums things up. Inside a customs union, “we would have to open up our markets to the third countries with which the EU had trade agreements, but the markets of such third countries would not be open to our exports since we would be outside the EU. And such third countries would have few incentives to sign trade agreements with us since their goods would already enjoy free access”.

You can see the problem. All sorts of soft Brexits make some sense – May’s deal and EEA/EFTA both make some sense – but anything involving a customs union like this just doesn’t. Some of its advocates say that our customs union with the EU will be different to others because the EU, in recognition of the size of our economy, will have to take our views into account (I have some sympathy for this view).

But these are usually the same people who keep telling us that the EU has “all the cards”, so who knows how any negotiation could end up, my worry being that a customs union could end up looking so bad for the UK that it wouldn’t hold, leaving us back at our rather trying square one again. Either way, given how very important they are to our exporters, wouldn’t it be nice if these points were part of this week’s conversation?

Reciprocity matters. For the market, however, the nitty gritty of the customs union doesn’t (in the short term, at least) matter so much as a deal, any deal. In preparation for that, we look at the possible “Brexit bargains”. As soon as we have clarity (it doesn’t matter on what, just clarity) they will bounce, says David Stevenson.

If you aren’t a long-term enough investor for that (only half a joke…). Max King looks at gold mining stocks – a rising gold price makes them more interesting than usual – and Andy Headley picks a few stocks that he reckons can transcend politics.